Trader Note

Trading short moves would be more lucrative to let run.


NFP & FOMC. S&P Pullback. See: EVENTS


This Week

Look to see some volatility in markets that are not closed on Monday. As markets digest what the NFP move will look like on Tuesday, expect some decent size hedges to enter markets.

FOMC minutes and bond auctions in the USA will be watched as traders try to gauge what a changing Fed policy will look like.



It has been 7 years since there was a negative printing on Non-Farm Payrolls.

Let that sink in: 7 years without a negative number on NFP.

As this number is often recalibrated after the initial release (often lower), having a negative printing means 2 things:

  1. The number is so horrible that they could not even cheat it higher.
  2. This is the start of a changing market.

What this means is that the FOMC is trying to extricate themselves from markets. Potentially, it means that they are not even trying to manipulate markets higher. This will result in higher interest rates and a falling stock market. Bond markets will likely NOT see the correlated boost of a falling stock market as the Fed continues to use that market for pumping money into the system.

The Fed will likely continue to buy bonds, as exiting this program would be disastrous to markets dependent on this money printing mechanism. However, look to a change in the yield-curve profile when this intervention changes. That means that they will be buying in the short-term range and leaving longer profile (10 - 30 year bonds) alone.

When the Fed says that they want to reduce their balance sheet, it means that they will be holding any bonds to expiration, NOT selling into the market. This means that they can continue to buy short dated bonds (continued capital infusion into the market) while holding those bonds for a shorter period (lower balance sheet in a shorter amount of time).

So expect a change to bond yield curves as the Fed changes policy. Also expect that falling markets may not provide the expected bond buying correlation, even though these markets have poorly correlated for years.


S&P Pullback

Shorting this market has been fatal to any negative bias traders' accounts. This has meant that short sellers of this market have dropped off. Anyone that wasn't using other people's money to trade this market has felt the pain in their P&L. This has left this market without a voice of reason on the short side, even though most traders believe that the markets are over inflated.

After five years of moving higher without a pullback, this market has broken some historic records. It has had more up days in a row. It has a record number of BTFD traders who have been chiming the same trading style for a sufficient period of time that they don't know how to be on the other side of the trade. It has traders selling volatility and making profits that they are heavily leveraged on the VIX contracts without realizing the disastrous amount of risk involved in such a trade, especially in a fear/dropping market. Markets have had a helping hand to shake out conservative voices, leaving only cheerleaders (positive bias traders).

This is what happens when central banks intervene in markets. With government money printing machines artificially propping markets, markets have not been allowed to trade freely. However as these central banks move out of manipulating these markets, they will be more susceptible to shock and pullbacks. After a run higher of 5 years, these markets should pullback.

The data prints these markets as doing well, but the underlying reality is that the world is not well. Many people are without work, and without work they cannot buy the products of retailers or car manufacturers. They cannot afford to buy in bloated real estate markets and can barely afford to help prop these markets with rent. Savers have been hit hardest by money printing as their spending power has been drained while their returns on capital have been hit by low interest rates. Borrowers and debtors are the only ones to win from low interest rates, as they pull value from future generations to prop these markets. As interest rates climb, many of those already struggling with debt will find their payments untenable, removing more customers from the market.

Interest rates must move higher, because holding bonds is worthless in a money printing environment with low rates. Real estate flipping becomes common in a low rate environment, and drives prices higher without providing value but when markets change flippers will contribute to the collapse. Negative interest rate bonds should still be seen as obscene as paying governments to keep wealth without any guarantee of safety.

So at some point, ALL market needs and wants a pullback. Historically, these pullbacks happen more frequently in October. This does NOT mean you should short the market, only to prepare for a dropping market if you would like to short (and are paying attention). If you have made profits in these markets, look to take those profits out of the market and wait for a buying opportunity on a move lower. As markets have moved higher for an extended period, expect that a real pullback will last for an extended time, so be patient when getting back into markets.

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